This is an entirely free service. No payments are to be made. Also send me The Ultimate Guide to Profiting From Derivatives and sign me up for Profit Hunter,a free newsletter that focuses on identifying short term money making opportunities.Download NowSubscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.

REC: Flat profits on forex hit

Nov 16, 2011

Rural Electrification Corporation (REC) declared its results for the second quarter of the financial year 2011-12 (2QFY12). The institution grew its net interest income and profits at 17% YoY and 13% YoY respectively.

Performance summary

Income from operations grows 27% YoY in 2QFY12 and 25% in 1HFY12, on the back of 24% YoY growth in advances (excluding interest accrued and due).

Non-interest income falls by just 18% YoY during the quarter, while falling 3% during the first half.

NIMs fall to 4.4% at the end of 1HFY12 from 4.6% at the end of 1HFY11 on higher borrowing costs.

Bottomline grows by a marginal 0.8% YoY in 2QFY12 and 6.6% in 1HFY12 on account of forex losses and higher interest costs.

Financial performance snapshot

Rs (m)

2QFY11

2QFY12

Change

1HFY11

1HFY12

Change

Income from operations

19,877

25,145

26.5%

38,647

48,274

24.9%

Interest expended

12,081

15,649

29.5%

23,088

29,680

28.6%

Net Interest Income

7,796

9,497

21.8%

15,560

18,594

19.5%

Net interest margin**

4.6%

4.4%

Other Income

677

555

-18.0%

1,194

1,156

-3.2%

Forex (gain)/loss

(273)

1,256

(268)

1,328

Operating expense

385

456

18.5%

727

874

20.1%

Provisions and contingencies

1

-

1

250

Profit before tax

8,360

8,341

-0.2%

16,292

17,298

6.2%

Tax

2,178

2,112

-3.0%

4,237

4,450

5.0%

Effective tax rate

26.0%

25.3%

26.0%

25.7%

Profit after tax/ (loss)

6,182

6,229

0.8%

12,056

12,848

6.6%

Net profit margin (%)

31.1%

24.8%

31.2%

26.6%

No. of shares (m)

987

Book value per share (Rs)*

142.5

P/BV (x)

1.4

* (Book value as on 30th September 2011)

What has driven performance in 1HFY12?

Despite rising interest rates, and a slowdown in infrastructure activity, especially in the power space, REC saw its loan book grow by 24% YoY in 1HFY12. Sanctions however saw a decline, falling by 4% YoY in 1HFY12. Disbursement growth came in at 14% YoY. Disbursements had a higher leaning towards generation with 52% going to the segment, compared to 59% previously. T&D (Transmission and Distribution) projects got a 38% share (31% previously). 82% of the company's loan book continues to be exposed to state governments. REC plans to grow its loan book by around 25% this fiscal.

Fresh sanctions take a hit...

(Rs m)

1HFY11

1HFY12

Change

Sanctions

332,700

319,580

-3.9%

Disbursements

101,910

116,020

13.8%

D/S ratio

30.6%

36.3%

Advances*

729,000

903,730

24.0%

* excludes interest accrued and due

REC has witnessed an improvement in its net interest margin (NIM) in recent years. A rise in interest rates will not hurt REC as the institution's lending rate is not locked at the time of sanctioning the loan. This is because the sanction runs for 3 to 4 years before it gets fully disbursed. Hence the rate of interest is charged on the basis of date of disbursement which takes care of the adjusted cost of borrowing at that point in time. Hence there are very few downsides to REC's NIM even in a rising interest rate scenario. Having said that, 13 rate hikes orchestrated by the RBI did lead to some margin erosion, which fell to 4.4% from 4.6% earlier.

Its borrowings from banks stand at only 8% of its overall borrowing portfolio. Thus, it may not be as exposed to bank's rising base rates, compared to other NBFC peers. It has not opted for bank loans this fiscal on account of the high base rate regime. Is has seen a huge increase in forex loans, preferring to avail of cheaper funds from abroad. The only unhedged portion of its forex borrowings is US$ 250 m, with the rest of the US$ 1.25 bn being fully hedged. Irrespective, it saw a Rs 1.3 bn forex loss, compared to a gain last year, contributing to a benign increase in profits.

Borrowing Profile

(Rs m)

1HFY11

% of total

1HFY12

% of total

Change

Capital Gain Bonds

102,650

17%

120,650

16%

17.5%

Institutional Bonds

338,800

56%

481,970

64%

42.3%

Banks, FIs, etc.

107,640

18%

62,620

8%

-41.8%

Foreign Currency

40,690

7%

90,960

12%

123.5%

Commercial Paper

14,500

2%

-

0%

-100.0%

Total

604,280

100%

756,200

100%

25.1%

* FIs = financial institutions

REC had 0.3% gross NPA levels at the end of 1HFY12; this is an increase from 0.03% levels seen in 1HFY11. The increase in NPA levels was on account of non-performing assets of Maheshwar Hydroelectric project. REC is hoping that some necessary restructuring will be done for this particular project over the next few months. This account was shifted to the NPA side last quarter, REC has not seen further stress in other accounts, and has slowed down the sanctioning of loans. It does not believe that it will see a significant increase in NPAs till the end of this year. However in FY13 there may be some accounts which may need some restructuring. It has a Rs 85 bn exposure to Tamil Nadu Electricity Board, the account which was recently restructured by PNB from short term to long term loans. However, most of its exposure on this account is on the generation side and long term in nature. Thus, it is not seeing much stress on this account.

What to expect?

At the current price of Rs 186, the stock is valued at 1 times our estimated FY14 adjusted book value. As per the management, the company will try and maintain its asset quality as the Ministry of Power is building up pressure on various state governments in order to increase state electricity boards' (SEBs) tariffs. This will help them meet their loan obligations.

Even in a high interest rate environment, REC is well equipped to manage NIMs and spreads, on account of its overseas borrowings through ECBs. It has been able to maintain its spreads at 3.1% even with an the RBI's excessive rate hikes. The financer has also already increased its lending rates in order to offset higher costs. However some sectoral risks still remain with regards to coal availability for power projects, slowdown in infrastructure growth, and absence of tariff revision. Irrespective, it has seen robust loan growth, and this is expected to remain at around 20% for the fiscal. We reiterate our ‘Buy' view on account of the reasonable valuations the stock is trading at currently as most of the pains have been priced in.

COMPARE RURAL ELECT. WITH

OTHER USEFUL LINKS

MARKET STATS

ABOUT EQUITYMASTER

Since 1996, Equitymaster has been the source for honest and credible opinions on investing in India. With solid research and in-depth analysis Equitymaster is dedicated towards making its readers- smarter, more confident and richer every day. Here's why hundreds of thousands of readers spread across more than 70 countries Trust Equitymaster.

All rights reserved. Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.